Monday, February 5, 2018

Budget 2018 Impact on Your Tax – Who Saves and Who Loses

Delhi-based chartered accountant H.C. Sogani hasn’t stopped smiling
since Finance Minister Arun Jaitley tabled the budget 2018 in
Parliament. The senior citizen’s tax will come down by almost Rs 15,450
due to the tax exemption for up to Rs 50,000 interest earned from bank
deposits and Post Office schemes.
However, senior citizen taxpayers like Sogani are alone in this
celebration. Most other taxpayers, especially high income earners and
investors in stocks and mutual funds, have been sorely disappointed by
the tax proposals in the Budget 2018. The Budget 2018 has hiked the cess
on tax from 3% to 4% for all taxpayers, a measure that will push up the
overall tax of high-income taxpayers.
A taxpayer earning Rs 60 lakh a year will pay Rs 13,354 more in tax,
while a high-income taxpayer with a taxable income of Rs 1.2 crore will
pay Rs 33,868 more. “Rich taxpayers who were expecting some relief in
surcharge are disappointed. They will pay more tax next year,” says Amit
Maheshwari, Partner, Ashok Maheshwary & Associates.Retired pensioner: Big relief in taxBiggest
beneficiary of tax proposals in Budget 2018. The exemption of up to Rs
50,000 interest and higher deduction of medical insurance will reduce
the tax of this segment.No change in basic tax exemption, Sec 80C limitA lot of taxpayers were hoping that the Budget will raise the
basic exemption limits to Rs 3 lakh for general taxpayers and to Rs 5
lakh for senior citizens. Some had even hoped for a widening of the tax
slabs and a higher tax savings limit under Sec 80C.

However, as many tax experts pointed out last week, these measures
would have burned a big hole in the exchequer. Instead of major changes
in the tax structure, Jaitley has done some tinkering by reintroducing a
standard deduction of Rs 40,000 for salaried taxpayers.Low income earner – Negligible tax cut – Gross income – Rs 6 lakhGains from the introduction of standard deduction are almost nullified by the removal of medical and transport allowances.
When Jaitley announced the standard deduction, salaried taxpayers
across the country felt relieved. But the optimism soon dissipated when
the Finance Minister followed that with the removal of the tax-free
transport and medical allowances. Experts say if these allowances are
removed, the standard deduction will have a limited impact on the tax
outgo.Mid-income with home loan – Expectations not met Gross income: Rs 12 lakhNo
increase in basic exemption, investment limit or home loan benefit
means the gains from introduction of standard deduction are negligible.
“The standard deduction of Rs 40,000 for salaried individuals is a
nominal benefit because medical reimbursements and transport allowance
were anyway leading to Rs 34,200 as tax-free salary,” says Alok Agrawal,
Senior Director, Deloitte India.

The
Rs 40,000 standard deduction will reduce the tax of a salaried person
earning Rs 15 lakh by over Rs 12,000, but if he already gets Rs 19,200
transport allowance and Rs 15,000 medical reimbursements, his tax
savings will be only Rs 521 (or less than Rs 50 a month).High-income earner – More pain, no gain – Gross Income – Rs 60 lakhWith
no additional benefits, the impact of standard deduction is negligible
while the additional 1% cess on tax pushes up the overall outgo.

However, tax professionals point to other non-monetary benefits.
“Many taxpayers have to fudge medical bills to claim the tax-free
allowance. This practice will now stop,” says Sudhir Kaushik, co-founder
of Taxspanner.com. “The compliance and paperwork for employers will
also come down,” says Preeti Khurana, chartered accountant & chief
editor, Cleartax.NPS too awaits tax changes
Another major expectation was a change in the tax treatment of the
NPS corpus. Right now, 40% of the NPS maturity corpus can be withdrawn
tax free, 40% has to be put in an annuity plan to earn a monthly pension
and 20% is taxable. This 20% can escape tax if put in an annuity. But
it eventually gets taxed because the pension is fully taxable. Pension
from the annuity is a mix of the principal and the gain, so the investor
effectively pays tax not only on the gains but also on the invested
capital.
Investors, pension funds and even the pension regulator were hoping
for a change in the tax treatment of NPS to make it more attractive for
investors. The Pension Fund Regulatory and Development Authority (PFRDA)
had also written to the Finance Ministry that NPS Tier II savings
should get the same tax benefit as mutual funds.
However, the Budget 2018 does not touch these issues at all. “No
change in the tax treatment means the plan to allow Provident Fund
subscribers to switch to NPS will also have to wait. Nobody will want to
move from the 100% tax free Provident Fund to a scheme that is only 40%
tax free,” says a senior PFRDA official.Tectonic changes in LTCG
On the other hand, the Budget has unleashed havoc in the stock
markets by reintroducing the tax on long-term capital gains from stock
and equity funds. The Sensex tanked by nearly 840 points on Friday due
to widespread selling pressure. Analysts say this will continue as
investors try to book profits before the LTCG tax comes into effect in
the new financial year starting 1 April.
The good news is that the tax has a very liberal threshold and will
apply to long-term gain beyond Rs 1 lakh. Small investors with a
ortfolio of `10-15 lakh will not have to worry. Even big investors can
avoid the tax by keeping an eye on the calender.
Even so, the big fear is that the sharp decline in stock prices could
make new investors jittery. Small investors have taken to mutual funds
in a big way in recent years, adding over two crore new folios in the
past two years (70 lakh in 2016 and 1.4 crore in 2017). Nearly Rs
1,50,000 crore has flown into the equity markets through mutual funds in
the past one year. Investors are pouring in nearly Rs 6,200 crore every
month into equity funds via SIPs. This liquidity has helped the markets
climb new peaks in recent months, but a sustained decline in stock
prices could arrest the inflows.
The other danger is that investors will be lured by distributors of
other products such as Ulips and traditional insurance policies. Being
insurance products, the income from these plans are not taxable under
Section 10(10d). Ulips have changed for the better after the insurance
regulator capped charges in 2010, but traditional insurance plans
continue to have very high charges. Their returns are barely 4-5%, but
if stock markets are down and LTCG are taxed, insurance agents will be
able to palm off these plans to investors. “It will be open season for
insurance agents,” says a fund manager.
Source: ET

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